Capital Goods - August 2011

Down the rabbit hole

By Scott Mooneyham

Illegal immigration can do funny things to politicians. Bring up the topic and sometimes even the most loquacious elected officials clam up. Even more bizarre is when party and ideological principles are turned on their heads. So it was when North Carolina became the sixth state to adopt a law requiring a broad range of private employers to use a federal electronic database to prevent the hiring of illegal immigrants. The General Assembly adopted the requirement after an Alice-in-Wonderland debate in which Democrats claimed to be champions of business and Republicans, the defenders of labor. “Folks, I didn’t come down here to impose greater regulation on business in this state. What are we doing here?” said Rep. Bill Faison, a Democrat from Orange County. Rep. George Cleveland, the Jacksonville Republican who sponsored the bill, responded that he was trying to protect the labor force from workers who shouldn’t be here: “This is a jobs bill for North Carolina citizens.” Neither Alice nor the Mad Hatter were spotted in the gallery. No one cried out, “Curiouser and curiouser!”

Regardless, Gov. Beverly Perdue signed the legislation in late June. It will be phased in over the next two years, with local governments having to check new employees’ backgrounds using the database — called E-Verify — beginning in October. For private employers with more than 500 workers, it takes effect Oct. 1, 2012. For those with between 25 and 500, effective dates begin in 2013. The bill exempts employers with fewer than 25 workers. Seasonal workers also won’t have to be checked. Violators face fines up to $2,000 for a third offense.

Cleveland pointed out that many big companies, including Bank of America Corp., already use E-Verify. State government and universities have used it to check new workers since 2007. That hasn’t stopped critics from condemning the move. Faison might have carped on another burden for employers, but the loudest criticism has been about the system’s error rate. It’s not very large on a percentage basis. According to statistics from the federal Government Accountability Office, 97.4% of workers run through the system are cleared. A report commissioned by the Department of Homeland Security found an error rate of only 0.8% among those not confirmed. But that small percentage could translate into thousands of individual workers.

North Carolina legislators never delved into another potential problem created by a broad E-Verify mandate — tax-collection losses. Examining a 2008 E-Verify proposal for private employers, the Congressional Budget Office estimated the losses to the federal treasury would amount to $17 billion over 10 years. The rationale behind the estimate is that some private employers, rather than replacing illegal workers, would begin paying them under the table. Those employers would no longer be withholding income and payroll taxes. In other words, the black-market labor force would increase. If the estimate is accurate, North Carolina would experience a revenue loss of its own, if only a fraction of the federal losses.

The criticism may not matter. If other states’ experiences with E-Verify and the rhetoric coming from Washington mean anything, even tougher restrictions may be on the way. Both Arizona and South Carolina have passed laws that can lead to the loss of business privileges if employers fail to verify workers or knowingly employ illegal immigrants. The U.S. Supreme Court recently upheld the Arizona law (a legal challenge brought by, among others, the U.S. Chamber of Commerce) about the same time that South Carolina was passing its restrictions. Under the South Carolina law, businesses will be issued an employment license, and a third violation of the employee-verification law would lead to it being revoked.

It might be interesting to see how that revocation would proceed if the alleged violator employed 500 people. Is a state going to shut down the largest employer in a particular community? Still, if South Carolina and Arizona today, why not North Carolina tomorrow? Some conservatives in the General Assembly aren’t going to want to be outdone by their counterparts to the south.

North Carolina’s law and other state employment verification laws could also become moot. Congress is considering its own E-Verify mandate for private employers. Similar federal bills have been filed before, but the growing number of state laws could cause more business groups to get on board for the sake of uniformity. How a federal mandate would compare to North Carolina’s new law is anyone’s guess. What isn’t guesswork is that the issue isn’t going away.